All posts tagged Fannie

The New York Fed has added Fannie Mae, Freddie Mac and other government-sponsored mortgage entities to the growing list of possible counterparties in reverse-repo transactions, which the Fed will, some day in the misty future, use to mop up all of the liquidity sloshing around the system.

The GSEs join a growing roster of future counterparties, including the usual primary dealers and domestic money funds.

It’s a bit of a brain-bender, if you think about it: One group of government entities will transact with the Grand Poobah government entity, the Fed, occasionally using as collateral the same paper those government entities have issued or backstopped.

It could be the end of the road from Fannie Mae and Freddie Mac, the two government-controlled mortgage giants. At least eventually.

As we highlighted earlier in the week, the government is taking a hard look at its role in the housing market, chiefly the job done by Fannie Mae and Freddie Mac, two government-backed giants who dominate the mortgage markets.

Fannie, started in 1938 to help boost home purchases during the Great Depression, and Freddie, created in 1970 to play a similar, competing role, have a central role in the home mortgage market. The acquire qualified mortgages from banks, package and resell them, guaranteeing the securities. This helps grease the housing financing process. Last year, the two entities acquired 90% of new mortgages.

Other nearer-term proposals from the White House include reducing the ceiling for so-called qualified loans. Currently, the duo will guarantee mortgages in expensive parts of the country at up to $729,750. That ceiling would drop to $625,500 on Oct. 1 and continue to fall in future years. In addition, the White House proposes increasing minimum down payments to 10%, though some analysts had expected it to call for minimum down payments of 20%.

The proposals promise a heated debate in Washington, and despite the tough talk today, it’s not clear how the debate will play out. Overall, the plans are likely to make home loans more expensive and tougher to get. That reality may sow the seeds for a political movement to preserve some role for the government in the sprawling mortgage market.

One of the remarkable sidelights of the Fannie/Freddie debate is that the stocks still trade. In the casino that is otherwise called the bulletin board, punters take their chances. And today it is a rough world.

Shortly after the opening bell, Fannie Mae is down about 15% to 51 cents a share on more than 9 million shares traded. Freddie Mac is down a more modest 12% to 56 cents on 5 million shares traded. Fannie Mae’s average daily volume is 13.5 million. Freddie trades about 6.7 million shares a day.

Looks like a big week for home mortgage financing chatter down Washington Way, and that might be one reason that the big bank stocks are having a rather robust session.

Much of the debate remains murky, caught up in proposals and counter-proposals. And with the House having one view (government get out of the mortgage game) and the White House and Democrats with another (a bit more inclined to some government role), a sweeping compromise isn’t expected before the next round of elections in 2012.

Still, according to MF Global, some moves in the interim look more likely than others, especially if they don’t rely on Congressional approval. And the White House and Congress have started floating some ideas to see what might gain traction. Among them:

A reduced role for Fannie Mae and Freddie Mac. The two big mortgage giants were placed into government conservatorship in Sept. 2008. The rescue has cost taxpayers $134 billion – so far. The Congressional Budget Office estimates that will balloon to $390 billion in the next decade. With the fiscal picture ugly, pressure is mounting to curtail those losses.

Big banks potential winners. If the government pulls back, that would “open the door for the private sector to step in the breach,” MF Global argues. “We believe this represents an opportunity to the mega banks, which have balance sheets that could be used to originate mortgages and investment banking units that could securitize those mortgages.”

Possible restructuring of Fannie and Freddie. MF thinks the government could convert its giant preferred stakes in Fannie and Freddie into common. This would “eliminate the need for the enterprises to borrow from Treasury to pay the government dividend payments.” Think about that transaction for a moment. Head spinner!

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